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September 15, 2014

Deutsche Bank research publishes global review report.

Deutsche Bank’s research team have just published the latest edition of The House View, a monthly flagship report which outlines Deutsche Bank Research's key views on the global economy and financial markets. The September edition takes stock of the recovery to date following the global financial crisis, and focuses on the global macro outlook, the monetary policy outlook, our market views and a series of thematic ideas.

The report in summary:

The global economy is strengthening. The US continues to gain traction and robust growth is expected (3%+) through 2015. China is witnessing a cyclical upturn, and hard landing fears have eased. In contrast, the Eurozone failed to grow at all in Q2, in part due to headwinds from Russia. German quarterly growth lagged that of the Eurozone for the first time in five years, while Italy entered its third recession since 2008. Although Eurozone growth is expected to accelerate in the coming quarters, risks remain firmly to the downside.

The divergence in the US and Eurozone growth outlook has put the ECB and the Fed on different trajectories. The Fed is getting closer to tightening; QE will finish in October, and we expect a more hawkish stance and the signal of faster rate hikes by year-end. On Sep 4, the ECB exceeded market expectations by cutting rates further and signaling that it aims to increase its balance sheet by EUR 1tn via private asset purchases and liquidity provision for banks. We view this as the ECB indirectly targeting a weakening of the Euro. While the ECB kept the door open to large-scale sovereign bond purchases, Fed-style QE would be far less effective and much more challenging in Europe.

Against this backdrop, markets have performed strongly. Equities are generally at or near their year’s (or even all-time) highs; US HY credit has reversed its summer sell-off; sovereign bonds yields have plummeted. In the Eurozone, two-year yields are now negative in six countries. Notably, the Euro has started to weaken.

Markets remain in the fragile equilibrium of gradually improving growth and easy monetary policy, with volatility low and likely to remain so in the very short term. This environment should continue to support risk assets generally, with ECB action particularly positive for peripheral assets. Sustained weakness in Europe, a turn in Fed policy, and geopolitical tensions remain the key risks.

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